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Thursday, January 21, 2016

Oil is a Bad Investment

Iinvestors can no longer avoid the realization that their fossil fuel holdings are fraught with risks. While there are many factors at play, the 18 month slide and low price forecasts combine to make the point that investing in oil makes no economic sense.

In the short term China's slowing growth and the glut of oil are driving down the price. The situation will be exacerbated by the lifting of sanctions allowing Iran to sell its oil. High production and lower than expected demand mean that oil prices will continue to fall well into 2016.
Oil has fallen a long way, it has lost 80 percent of its value compared to its high in January 2014 when it was more than $110 a barrel (bbl). When oil slipped below $60/bbl a number of intensive drilling operations from the Arctic to the Canadian tar sands and American shale oil ceased to be profitable. These price declines reduced production but not enough to stop oil's plummeting trajectory.

At the end of 2015 the price oil plunged below $40/bbl. As the new year dawned oil prices continued to slide, they even briefly slipped below $30/bbl. US oil prices fell to $26.55/bbl on January 20th. We have not seen oil prices this low in 14 years and we have not seen an 18th month long slide in more than 60 years.

According to the Financial Forecast Center the outlook for the next six months suggest that oil will continue to decline, falling to around $25/bbl by the start of the summer.

Although the market will eventually balance out supply and demand, the longer term outlook is still challenging for oil prices. The eia predicts that oil prices could fall to as low as $20/bbl in 2017. The Telegraph reports that some are predicting that oil could go as low as $10/bbl.

Looking even further out the situation for oil may become even more difficult. The COP21 deal sent a powerful message to the markets. The era of oil is coming to an end and as we gear up for the implementation date of the deal in 2020 there will be unprecedented downward pressure on oil prices.